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The Pros & Cons

 
Business Comparisons
 
Entity  Advantages Disadvantages
Sole Proprietor Schedule C and Schedule F

* Easiest business to organize
* Owners free to make decisions
* Minimum legal restrictions
* Business is easy to discontinue
* If owner materially participates, losses can offset other income

* Unlimited liability for the owner
* Limited ability to raise capital
* Skills limited to owners ability
* Income tax cannot be deferred by retaining profits
Partnership
Form 1065
* Easy to organize
* Better financial strength than sole proprietor
* Combines skills and judgments of more than one person
* Has a legal status
* Each partner has a personal interest in the business
* If partner materially participates, losses can offset other income
* Unlimited liability for the partners
* Authority for decisions is divided
* Income tax cannot be deferred by retaining profits
Corporation
Form 1120
* Life of business is perpetual
* Stockholders have limited liability
* Transfer of ownership is easy through sale of stock
* Easy to raise capital
* Shared management
* Adaptable to small and large businesses
* Tax-free fringe benefits for owner/employees
* Double taxation.  Profits are taxed at the corporate level and dividends distributed to the shareholders are taxed at the individual level
*  Difficult and expensive to organize
* Corporate charter restricts types of business activities
* Subject to many federal and state controls.
* Courts may disregard the so call "corporation liability shield" in the case of single shareholder corporations
* $800 Minimum tax to Franchise Tax Board
S Corporation
Form 1120S
* Double taxation of earnings is avoided
* Same limited liability as C corporation
* Passthrough of profits is not subject to SE tax as in a partnership
* Fringe benefits restricted
* Shareholders pay tax on undistributed profits
* Less flexibility for choosing a tax year
* Number of shareholders is limited
* Courts may disregard the so call "corporation liability shield" in the case of single shareholder corporations
* $800 Minimum tax to Franchise Tax Board
Limited Liability Company (LLC)
Form 1065
* Same limited liability as corporations
* S Corp restrictions on number of owners does not apply
* Can be owned by corporations
* Must have at least two owners for federal tax purposes (S corporations can have one owner)
* Earnings may be subject to SE tax
* Income tax cannot be deferred by retaining profits
* Life of LLC may be limited
* $800 Minimum tax to Franchise Tax Board
NOTE:  Please be advised all above entities have more issues, call us for more details. 
 
 

 

 

 

 

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